Professional Documents
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824–837
Abstract Conventional welfare state policies that centre on education, training, progressive taxation,
and social insurance are inadequate to address labour market polarization, which is capitalism’s most
pressing inclusion challenge at present. We propose a strategy aimed directly at the productive sphere
of the economy and targeting an increase in the supply of ‘good jobs’. The main elements of this
strategy are: (i) active labour market policies linked to employers; (ii) industrial and regional policies
directly targeting the creation of good jobs; (iii) innovation policies that incentivize labour-friendly
technologies; (iv) international economic policies that facilitate the maintenance of high domestic la-
bour/social standards. These elements are connected both by their objective—expanding the number
of good jobs—and by a new approach to regulation that is collaborative and iterative rather than top-
down and prescriptive. We emphasize the importance of new institutional arrangements that enable
strategic long-term information exchange and cooperation between governments and firms.
Keywords: good jobs, welfare state, reforming capitalism
JEL classification: D60, F13, H10, H20
I. Introduction
Capitalism is not a rigid system. It has evolved and changed over time, shaped by local
history, social pressures, and crises. Today, it is commonplace to contrast the ‘state
capitalism’ of China with the less state-directed version in the West. But even within
Europe and North America, there are significant differences among Nordic corporatist
and the Anglo-American variants of the market economy. And all these contemporary
models of capitalism differ from the historical versions that prevailed until the emer-
gence of the welfare state after the 1930s.
Markets are not self-creating, self-regulating, self-stabilizing, or self-legitimizing.
Hence, every well-functioning market economy relies on non-market institutions to
fulfil these roles. Often put in place by the state, these institutions range from prop-
erty and contract enforcement systems to social insurance and income redistribution
mechanisms. Capitalism’s adaptability derives from the inherent plasticity of such
1 It is useful in this context to consider how China has managed to provide effective property rights in-
centives and contract enforcement through institutional arrangements that differ greatly from conventional
Western ones (Rodrik, 1996; Qian, 2017).
2 Osterman (2020) provides a very valuable set of case studies on what can be done to increase good jobs
in specific industries. See also Ton (2014), who discusses how it may be in many firms’ self-interest to enhance
the quality of the jobs they offer.
3 This paper focuses on advanced economies. Many developing economies seemed to have been doing
better prior to the pandemic, on the back of export-oriented industrializing strategies. However, even before
the pandemic there were signs that their growth models were running out of steam (see Diao et al., 2019, and
Rodrik, 2018).
826 Dani Rodrik and Stefanie Stantcheva
generated by fiat; they are contingent on higher productivity and the expansion of good
firms. The proposed strategy is one that specifically focuses on productivity enhance-
ments along the middle spectrum of the labour market. Second, the strategy requires
an approach to governance and regulation that differs from the standard ex ante, arm’s
length model that is familiar to economists. We elaborate on that governance model
4 President Biden’s infrastructure plan commits federal resources to scaling up sectoral training pro-
A second consideration is that business incentives work best when they are custom-
ized and targeted to specific needs of firms, and when they are part of an iterative dia-
logue between firms and government agencies. The traditional caricature of industrial
policy, in which bureaucrats choose a set of economic activities to be promoted, select
pre-determined incentives (e.g. tax rebates or subsidized credit), and then impose hard
A particular objective would be to connect business incentives more tightly with the
kind of labour market and training programmes discussed previously. While labour
market interventions may do a good job of preparing job-seekers for good jobs, their
effects will remain limited if there is not a corresponding increase in the supply of good
firms and of good jobs in existing firms.
5 https://www.teslarati.com/inside-tesla-tent-based-model-3-production-assembly-line-profitability/
832 Dani Rodrik and Stefanie Stantcheva
investors. This may exclude innovations where the gains are longer term or reaped by
society at large (Lerner and Nanda, 2020).
Third, most advanced economies tax capital income more lightly (through depreci-
ation allowances and various incentives of the type we discussed previously) and tax
labour more heavily (through personal income taxes, social insurance contributions,
6 ‘So-so’ technologies are those that substitute labour, but are not that much more productive at the task
suspend them. The most reliable guarantee against abuse of opt-outs is informed de-
liberation by the polity at large. The requirements that groups whose incomes would be
adversely affected by the opt-out—importers and exporters—participate in the delib-
erations and that the domestic process balance the competing interests in a transparent
manner would minimize the risk of protectionist measures benefiting a small segment
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